In recent years, electronic trading systems have gained a widespread acceptance for trading items. For example, electronic trading systems have been created which facilitate the trading of financial instruments such as stocks, bonds, currency, futures, or other suitable financial instruments.
In some marketplaces, electronic trading is so prevalent that much occurs between computers without human interaction. The market for Foreign Exchange (“FX”) of currencies is one example of such a marketplace, whereby currencies for “spot” exchange (i.e., settlement in two business days time) may trade between computers around the globe 24 hours a day. In the foreign exchange spot (“FX Spot”) market, some trading system hosts or providers (“trading systems”) operate as “name give-up” systems whereby market counterparties to a trade are revealed to each other at the time of that trade. In some other markets, the trading system provider may act as a clearing counterparty, or have a relationship with a central clearing counterparty, such that trades may to be matched without counterparty names being revealed. In name give up markets, when a trading system trades with a market maker order, the trading system, or even the market maker computer system, may hold back acceptance of such a trade until it can check the name of the opposing counterparty to ensure credit is available for the trade. In markets in which a clearing counterparty has been facilitated, a market maker computer system may also hold back acceptance until it has internally checked the foreign exchange rate or price upon which it is being requested to trade.
A market maker (for example a large bank in the FX Spot market) may supply price feeds (e.g., bid-offer spreads) to multiple trading systems to allow them to flood the general marketplace with the market maker's best bid and offer price. Market makers typically generate revenue from sheer volume of trades executed on their prices, by persistently trading at their bid and offer prices and making the difference as profit. This strategy may be referred to as “trading the bid-offer spread.” The success of such a strategy relies on, among other things, trading repeatedly and at great frequency, and may also depend upon keeping long or short positions in any one currency to a minimum. Thus, a market maker may need to ensure its price feed is provided to as many trading systems as possible in which FX Spot liquidity and regular trading are present.
The strategy of “trading the spread” can be risky when markets move quickly. A market maker may acquire a large position long or short and be unable to unwind such position during a market move, creating a loss. In this environment, considering that the market maker may have its bid-offer price on many trading systems, it is important for the market maker to be protected against latency in any of those trading systems, at the same time limiting their risk. To guard against becoming overly long or short in any one currency at a disadvantageous price due to latency, a market maker may require the trading systems with which it trades to request a trade authorization or confirmation from the market maker's computer “price feed,” rather than deliver a trade confirmation to the trading system as a fait accompli. Thus, there is a difference between (a) a market maker giving a trading system a price, until cancelled, upon which the trading system can trade, and (b) the trading system acquiring the same price from a market maker's “price feed,” but needing to request trade conformations from the market maker to confirm that the price feed has not changed. The latter system may be described as the trading system acquiring bid and offer prices from the market maker price feed on a “not held” basis. Such system may afford the market maker some protection against trading system latency, and also against a plurality of trading systems all trying to trade on the same market maker bid or offer simultaneously. In a fast moving market, such protections may be of particularly important. Where trading systems acquire bid and offer prices on a such a “not held” basis from a market maker price feed, they may choose to hold up confirmation of trade executions until the market maker has accepted them. In addition, in some cases, where the trading system has a central clearing counterparty, the trading system operator may take a resulting position on themselves, with an exceptions procedure to neutralize such trading positions.
Many trading systems facilitate the display of limit bids and offers, i.e., bids and offers at less aggressive prices than the bid(s) and offer(s) currently at the best price (or “touch price”). It is often preferable for a market maker to take advantage of such facility to increase the depth of the bids and offers it allows such trading systems to display on their behalf. The market maker's computer system may generate a series of bids and offers such that in a fast moving market they may trade at different levels in quick succession, as opposed to the market maker trading at the best (“touch”) price first and then needing to recalculate a new (e.g., slightly worse) price each time before trading again, which may possibly result in declining trades from other trading systems during such recalculation, particularly in fast moving markets, such as the Foreign Exchange market. Also, by using a series of limit bids and offers a market maker may be able to show more size to a trading system but also decrease its risk profile from avoiding showing all of its bid and offer size at only the touch bid/offer prices. Increased size at the touch price may attract other traders to a trading system, but in a suddenly fast moving market it may expose the market maker or the trading system to an undesirable level of risk of being “picked off” by other better informed traders in the market place. In a slow moving market, a market maker may have their price distributed to as many markets as possible with the goal of being the best available bid and/or offer, thus resulting in higher trade volume. In a fast moving volatile market, such a strategy may often result in revenue losses. One dilemma a market maker faces is to both support the trading systems with bid and offers price in as much size as possible, but to not be traded upon simultaneously by too many of those trading systems in a suddenly fast moving market at prices that rapidly become disadvantageous to the market maker.
Where a market maker chooses to make prices available using a price feed as discussed above, it is typically important for all forms of systems latency to be minimized. The speed with which a market maker's computer systems can process trades may dictate the amount of trades it can accept over a short period of time, and ultimately may limit the number of trading systems the market maker may be able to allow their bid and offer prices to be used by. In addition, the speed with which a trading system can make a trade confirmation request to the market maker price feed computer may determine whether that trade is actually executed. In a fast moving market, a delay of only a few hundred milliseconds by the trading system may result in the denial of a trade confirmation request by the market maker price feed computer. Network transmission speed may often be a significant factor of the time taken to get a trade or trade request from a trading system to a market maker's system, and when dealing in milliseconds, the geographical domicile of each computer system may create a network delay that is costly to minimize through higher bandwidth or faster computer networking equipment. Thus, any reduction in processing time for trading is advantageous. Often, with multiple trading systems all accessing the same market maker price feed computer, only the fastest trading system or Systems succeed.